Britain is ‘poster child’ for bad decision-making, bond investor claims

Liz Truss’s mini-Budget caused borrowing costs to soar and brought down her government - Geoff Pugh/The Telegraph

Britain has become the “poster child” for bad decision-making, a leading bond investor has warned.

A string of poor policy choices have pushed up government debt costs and left the UK more exposed to “tantrums” in the market, said Jason Borbora-Sheen, a portfolio manager at Ninety One.

Mr Borbora-Sheen pointed to the bond market reaction to Liz Truss’s mini-Budget and Donald Trump’s tariff onslaught as examples of how Britain’s debt had a greater “magnitude and likelihood” of what he called “pinch points”.

Borrowing costs surged in both cases, bringing down the Truss government and blowing a hole in Rachel Reeves’s Budget.

“I’d almost see the UK as the poster child for poor historical monetary and fiscal policymaking,” he said. “The way the UK is set up leaves it exposed to tantrums occurring more frequently and of the worst magnitude that you would typically feel comfortable with in a developed world sovereign bond market. That’s what leaves us thinking that it’s not particularly compelling.”

Mr Borbora-Sheen said a failure to properly contain inflation, address high public debt and boost growth was to blame for the situation.

Borrowing costs climbed earlier this year after a Labour backbench rebellion over reforms to disability benefits meant to cut spending and boost growth. Bond yields also jumped in January amid concerns that the Chancellor had not left herself enough fiscal headroom in her October Budget, despite raising taxes by £40bn.The Chancellor is preparing for her autumn Budget - Justin Tallis/AFP via Getty Images

Mr Borbora-Sheen said ministers need to be prepared to make some “hard choices” if they want to improve Britain’s position in international debt markets.

“You would need to have a hit to growth and be willing to accept less politically-favourable policymaking in order to get your financial position back to something more compelling,” said Mr Borbora-Sheen.

“If you don’t do that, you do get this quite unattractive cycle occurring of high yields, making decision-making around Budgets difficult, giving you little room to make more strident choices and that becoming re-enforcing.

“You’re not getting your fiscal house in order and it’s causing problems for your bond market again and again.”

Ninety One, which manages £139.7bn in assets, was formed as Investec Asset Management in South Africa in 1991 before demerging and listing on the FTSE 250 in 2020.

Long-term UK government borrowing costs have edged towards their highest level since 1997 as Britain grapples with a toxic combination of high inflation, high government spending and narrow fiscal headroom. The yield on 30-year UK gilts has climbed from 5.13pc at the turn of the year to 5.55pc today.

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Bonds usually become more attractive when yields – the return an issuer promises to a buyer of its debt – rise. Greater investor interest helps to limit or push down borrowing costs.

However, Mr Borbora-Sheen said Britain’s bond market was unattractive despite the high yields on offer as investors were unsettled by inflation, which rose to 3.6pc in June.

He said: “The reason you have higher rates in the UK is that inflation is sticky. So if you compare the UK’s 10-year bond yield to the US’s, it’s 0.4pc higher.

“It sounds small but in the scheme of things is actually quite meaningful, particularly when you have a high interest rate burden too, as the UK does, with the need to keep financing those bonds.

“So [Britain] is not being given a lot of credit by those fixed-income markets.”

Money markets suggest that the Bank of England is unlikely to come to the Chancellor’s rescue. Traders on Monday reduced bets on another interest rate cut this year, with no action now seen as the most likely outcome for the rest of the year.

The Bank of England cut interest rates to 4pc earlier this month – the fifth reduction in rates since August last year. However, inflation has been creeping up, with the next official data published on Wednesday.

Anita Wright, of Ribble Wealth Management, said: “Markets don’t believe the UK has its long-term finances under control.

“Despite four rate cuts in the past year, the 30-year yield hasn’t come down. Why? Because investors are worried about two things: inflation sticking around and the Government’s addiction to borrowing.”

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